洛克希德·馬丁 (LMT) 2010 Q1 法說會逐字稿

Good day and welcome everyone to Lockheed Martin's first quarter 2010 earnings results conference call.

Today's call is being recorded.

At this time for opening remarks and introductions I would like to turn the call over to Mr.

Jerry Kircher, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Shaun, and good morning, everyone.

I would like to welcome you to our first quarter 2010 earnings conference call.

Joining me today on the call are Bob Stevens, Chairman and Chief Executive Officer, and Bruce Tanner, Executive Vice President and Chief Financial Officer.

I would like to remind everyone that statements made in today's call that are not historical fact are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities law.

Actual results may differ.

Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results.

We have posted charts on our website today that we plan to address during the call to supplement our comments.

Please access our website at www.lockheedmartin.com and click on the Investor Relations link to click and view the charts.

With that I'd like to turn the call over to Bob.

Good morning, everyone, thanks for joining the call today.

I hope you had an opportunity to read our earnings release and take a look at our updated guidance.

Overall in the quarter our operational Tempo and execution were strong.

Quality levels were good, and each business area achieved expected results.

In the United States since we last spoke several events have occurred.

The President proposed a defense budget for 2011 at $549 billion which was 3% over the 2010 budget levels.

When we look out over the longer term, the future year defense program, that's the projection that looks out over a five-year horizon maintains an overall 3% growth projection for DOD.

Finally, the quadrennial defense review, that more strategically oriented document, was also completed and released, and the priorities outlined in the QDR provide a solid level of support for a number of our lines of business in our programs including the F-35 joint strike fighter for the fleet replacement aircraft, our THAD, PAC-3 and Aegis systems for mobile and sea-based missile defense, the advanced EHF satellite for space command control communications, and the intelligence, surveillance and reconnaissance missions that communication supports and our Littoral Combat Ship for advanced surface naval combatants.

Clearly our customers continue to address the dual demands of expanding missions and fiscal pressures and we're working hard to support them by meeting our commitments, to shorten our cycle times, to overall reduce our costs, and focus more on affordability.

Internationally we see the opportunity horizon expanding.

With demand aligning well with our product portfolio.

We are pleased with the international awards we saw in the first quarter that included 20 new F-16 aircraft for Egypt, two new C-130J airlifters for Tunisia, sniper and lantern targeting systems for Turkey and a ten year logistic support contract for New Zealand's defense forces.

Last year we increased our goal for international revenues such that we generate 20% of total revenue from our international business, and we're on track to achieve that goal by 2012 and yesterday we were pleased to see a renewed call for export control reform that was brought forward by Secretary Gates.

Let me turn to our operations for a moment where I think we had a solid quarter and we met some key objectives in each business area.

In aeronautics Ralph Heath and the aeronautics team maintained overall a good operational tempo, and there are three areas that warrant greater discussion.

The F-35 is getting lots of extra attention as a result of the restructuring process that addresses risk, and positions the program for success and working through the Nunn-McCurdy recertification process, and I think here there may be some confusion about how the restructuring of the program and the Nunn-McCurdy recertification process align.

They're both really borne out of the same fundamental assessment of the program that evaluated our ability to execute and included a variety of estimates of risk factors that could affect the program.

The restructuring was initiated to reduce the overall risk of the program in order to facilitate the Nunn-McCurdy recertification.

When we look at the restructuring segment you see 13 month extension to the system design and development phase of the program while adding $2.8 billion in funding, expanding the resources available on the program to reduce risk by adding software labs or adding resources to the flight test program, very specifically the addition of one United States Navy carrier version of the aircraft to improve our overall ability to turn around test flights.

You will see the addition of an additional low rate initial production contract that we refer to as LRIP 9.

We have had a rephasing of the production ramp while incorporating some buy to budget flexibility that means if our program performance is on track, there will be an opportunity to add airplanes to the ramp rate, and then revising the program milestones.

The Nunn-McCurdy recertification is led by the Department of Defense, specifically headed by Dr.

Ash Carter, the under secretary of defense for acquisition technology and logistics, and we play a supporting role in that process.

I think that mechanism has been kicked off.

There are five evaluation criteria that have to be satisfied, and we believe that process will successfully conclude probably in the June timeframe.

On the F-35 we're focused on execution and know we need to improve our performance.

A key objective for us will be to build momentum in the program.

That's momentum as we work to finalize the tasks in the development phase of the program, momentum as we efficiently accelerate the production ramp up of the program, and importantly to build on the accomplishments that are being achieved in the test program.

In that test program two flight tests were particularly meaningful to us.

The achievement of the short take off and vertical landing of the STOVL aircraft where we were able to measure the behavioral characteristics of the airplane, power, lift, control, stability, all of which were excellent, and I think all that observe the tests were very pleased with those results.

The first flight of the mission systems equipped F-35 which happened on April 7th which demonstrated an avionics capability that no other fighter has demonstrated.

We're going to continue to focus additional resources on execution, and we'll continue to strengthen the team on the F-35.

In aeronautics we're also building volume on the C-130J production program.

We have commented to you over time our desire to expand this phase of the program, building on our 16 aircraft delivered last year to 26 airplanes delivered this year.

I think we've noted that those deliveries are likely to be phased towards the second half of the year, but overall demand for the airplane looks very solid, and the performance of the aircraft has been really superior.

Also in aeronautics we have been modernizing the C-5 galaxy aircraft, this is a very heavy lift segment of our US lift component, and putting new engines and essentially new cockpits and new avionics in the aircraft.

This program has successfully passed a very rigorous operational test and evaluation set of criteria and has now been certified as effective and mission capable.

We have delivered three of these airplanes to the United States Air Force and the current plans call for us to deliver 52 fully modernized C-5's by 2016.

It's my sense that if we continue to show real value here, real excellence and execution in performance and if the demands on US airlift continue there may be opportunities to talk about expanding that number in the future but here again we're very much focused on executing the current program of record.

[Marilyn Usin] and the electronics team continue excellent operational performance across the portfolio.

I think the Littoral Combat Ship deserves special mention.

Our first Littoral Combat Ship the U.S.S.

Freedom was deployed by the Navy this quarter, and it was deployed two years ahead of schedule, and I think the Navy is very proud of that accomplishment, and I can certainly tell you that we in our LCS team are very proud of our ability to shorten cycle times which has been a key objective of our Company and in alignment with the objectives of our customers.

In operations the ship's already intercepted four drug smuggling ships, and I think the crew of the Freedom is demonstrating superior performance in their prosecution of important missions.

Our second ship, the Fort Worth is more than 30% complete and is on its planned schedule and cost profiles.

We have submitted our bid for the next ten ship buy that would result if we were successful in prevailing in the competition to an initial award of two ships, and options for eight further ships and the Navy's decision as to selecting the winning design for the overall 55 ship fleet will probably be undertaken in the third quarter, so we'll keep you posted and look forward to that.

I don't want to play through the demands we have in focusing on competing for and winning the instant contract with the United States Navy, but I would note one of our objectives has been to try to look to aggregate demand for systems that have solid baselines that are flexible and extensible for a variety of customers, and this includes bringing in international customers in the baseline programs because the benefits are really quite manifest.

It is very good for US customers because it lowers the cost of every ship the US buys.

It is very good for the international customers because it has the same cost advantage, and it is good for us because we have a broader, more stable program that let's us integrate the global supply chain for effectively, get higher quality and really drive value for everyone, and so I am pleased that given the nature of the design of our ship, its performance in an operational environment, the steel semi planing mono haul design all of which appeal strongly to a variety of international customers, so as you might expect we're very focused on assuring we present good value to the United States Navy in our bid.

Moving to information systems in global services, Linda Goodman and the IS&GS team also achieved a key milestone this quarter with the commencement of their support of the 2010 census program, and I know you've all heard a lot about the census.

The role we play through our DRIS program, the Decennial Response Integration System is to conclude form processing and data capture that standardizes the response from potentially more than 300 million American citizens.

The U.S.

census effort as you know is crucial to assuring the right resource locations across the country required by the constitution and we feel confident that we'll be in a position to enable the administration to complete and review the census by December.

In my judgment our work on the census is a good example of the broad range of information technology, programs and support and services that IS&GS provides to a wide variety of US government agencies.

Finally in our space systems group under Joanne Maguire we continue to make significant progress on the advanced extremely high frequency satellite system.

This is a next generation communication system that's an essential element in secure military communications, and our first spacecraft is moving very close to delivery now in preparation for a launch in mid-2010.

These new secure communication satellites replace the Mill star series of satellites that many of you are familiar with.

To give you a sense of performance and how performance adds to value, because I think we spend a lot of time appropriately talking about our cost performance and our schedule performance as we execute contracts, we probably together spend less time talking about capabilities that we're delivering, a single advanced DHF satellite provides more communications capacity than the entire Mill star constellation flying today, so while we face challenges from time to time on cost and schedule, we do have meaningful accomplishments in adding to overall value.

The capability of systems like the measurable capability improvement on advanced DHF, many of our satellites last considerably longer than their design life, which we call mean mission duration, so they last longer that provides value, and as I mentioned in the case of LCS we're able to shorten the cycle time and move resources into the operational theaters sooner which is genuine value to customers.

On advanced DHF we're under contract for three satellites but we envision the possible expansion of this constellation to include six satellites as DOD now looks to assure the appropriate priorities for secure communications in space.

Before I leave space systems, we have had much discussion with you and others about human space flight and the constellation program for NASA, particularly our component of the constellation program, the Orion crew exploration vehicle.

Last Thursday President Obama when visiting the cape in Florida outlined a revision for the program calling for a modified version of the Orion capsule to act as an emergency escape vehicle to serve the international space station.

In the earlier plan that was described in February with the release of the President's budget submission to Congress, the Orion program was to be eliminated.

This new capsule we believe would likely be launched within the next few years and would certainly leverage and utilize the significant technology advances that our team achieved since the original Orion contract award in 2005 and we're very much looking forward to continuing work on the human space flight program through Orion.

I think these operational highlights illustrate our corporate wide focus on program execution, on completing key milestones, on continuously improving quality, and importantly on focusing on afford it which our customers need.

As I look forward I remain optimistic about our future because our product portfolio remains well supported based on the recent budget submissions for 2011, based on the revised priorities that have been outlined in the quadrennial defense review and the future year defense programs, and based on the changing security environment globally and quality of our portfolio as viewed through the eyes of our international customers where I think there will be more international opportunities.

We also maintain our interest in the potential that may reside in adjacent and horizon markets as we explore opportunities in cyber security, logistics, and establishment, particularly the logistics and sustainment activities that are improved through the application of information technology resources, prospects for healthcare information technology, or energy management, or renewable power generation, so we're carefully examining the quality and changes in those market segments.

I would be very much remiss if I didn't comment on the quality of our workforce because I think our team had an outstanding quarter, and that is very much due to the dedication and professionalism of the women and men who work in our Company.

They have not allowed themselves to be distracted by the increasing velocity of events or the increasing Tempo of activities that we see around the globe.

They're very much focused on our customers.

They're very much focused on achieving excellence in what they do and I am very proud to have the opportunity to represent them and work with them.

Let me turn to Bruce and he will give you some additional detail on the quarter and then we'll open it up for your questions.

Thanks, Bob.

To help with our discussions today, we have included some charts on our website and I would encourage you to open the charts and follow along as I make my comments.

Starting off with the first quarter sales summary on chart 3, overall the Corporation grew 3% in the quarter.

That was actually slightly higher than what I mentioned during the January call.

Aeronautics had the strongest growth at 5% over last year's numbers driven by the F-35 program which grew over 25% when compared to 2009, IS&GS grew 4% with most of that coming from the civil and defense lines of business.

Comparisons with the 2009 performance were hurt somewhat because sales for the TMOS and remember TMOS is the ground segment portion of the TSAT program and the MTA contracts were included in first quarter 2009 results that were terminated in the second quarter of last year.

Electronic systems was flat when compared to last year.

This was actually also somewhat higher than expected given that the presidential helicopter were in our 2009 results and we had growth and missiles and fire control and training that was able to offset that reduction.

Space system was also flat versus 2009, and there we had higher activity on the Orion program which was offset by lower activity in our strategic and defense missiles line of business.

Turning now to chart four is our cash flow, we had record cash generation over $1.6 billion in the first quarter and that did represent the highest quarterly cash from operations in our history.

Due to this strong generation of the cash in the quarter we increased our full year cash from operations guidance by $100 million to $3.3 billion.

If you now look at chart five for a discussion of our net debt and debt maturities.

As a result of our strong cash generated in the quarter our net debt is around $1.5 billion.

That combined with no debt maturities until 2013 gives us great flexibility and a strong capital position for a number of years.

On the next chart, chart six, we'll discuss our share repurchase activity.

You can see we repurchased 6.5 million shares worth over $500 million in the quarter.

We're on track or ahead of our goal to buy back at least $1 billion of shares this year, and these actions reduce shares outstanding to 368.5 million, the lowest level in our history, and at quarter's end we also had 22 million shares remaining in our share repurchase authorization.

Next I would like to highlight our earnings per share performance on chart seven.

Like many other companies this quarter we had an unusual charge as a result of the recently enacted legislation affecting Medicare Part D which we disclosed in an 8-K filing last month.

That resulted in $0.25 reduction to our EPS, and if you adjusted our GAAP EPS for this charge and for the FAS/CAS impact the resulting adjusting EPS would be $1.89 per share.

Finally, if you turn to chart eight we'll reconcile the revised 2010 EPS guidance with our January numbers.

Starting with our January guidance of $7.15 to $7.35 per share, the effect of the Medicare Part D charge I talked about earlier reduced the guidance by $0.25.

We were able to offset a portion of that impact through an improved outlook in our investment income and other corporate accounts and this $0.10 improvement results in a net $0.15 reduction in our new guidance of $7 to $7.20 per share.

So overall a solid quarter and in line with our expectations as we look forward to the rest of the year, we expect the second quarter sales growth over 2009 to be similar to what we experienced in the first quarter, and overall the second half of the year should have higher growth in the first half with the third quarter in particular having higher growth than the fourth quarter.

We expect margins to remain in the mid-to upper 10% range in both the second and third quarters and then move higher in the fourth quarter as we discussed on the last call.

We expect cash from operations will be lower in the next three quarters compared with first quarter as we make $1.4 billion in discretionary contributions to our pension trust.

In particular, the second quarter will likely be about $1 billion lower than the first quarter as we had a $325 million tax refund in the first quarter, a similarly sized tax payment in the second quarter and initial pension contributions also beginning in the second quarter.

With that I think we're ready for your questions.

Sean.

(Operator Instructions) Our first question comes from Robert Spingarn with Credit Suisse.

Good morning.

Good morning, Rob.

Actually a question for Bruce and a quick one for Bob if I may.

Bruce, IS&GS has been viewed by some as a proxy for government services as a whole, and we have had some pressure in margins there over time.

You were just above 8% this quarter but you're guiding to about 8.4 for the year.

If you could talk about what needs to happen to get there, and then separately, Bob, if you could simply comment on the possible loss of F-22 sustainment and what that might mean?

I will start off, Rob.

You're right, IS&GS we did 8.1% margin in the quarter, and I tried to tee up on the last call, the January call if you recall, that we thought IS&GS would have probably its lowest quarter margin wise in the first quarter, and that's reflective more than anything else because of the timing of award fees.

I always like to remind people that IS&GS has the largest percentage of its operating profit that it receives in the form of award feeds, and in this particular year, 2010, has a greater abundance of that award fee pool in the second half of the year, most specifically in the fourth quarter of this year.

That's just the way the contracts kind of fell out this year, so our expectation going forward, Rob, is probably that the next three quarters are going to be somewhat similar to first quarter, maybe a little bit higher than that, but then we would expect some movement higher than that in the fourth quarter as we recognize the receipt of some of those award fees.

Rob, let me pick up the F-22 sustainment.

We're under contract with our customer now through 2012 and under discussions how we can best continue to serve customer interests beyond 2012, and without certainly any arrogance intended in my comment, we obviously know a great deal about the F-22.

We have specialized skills and knowledge that we think would be of value.

In other words, to try to replicate some of these capabilities would have a certain set of consequences with it, so I think we're in a very good position to continue the sustainment of the F-22, but we're under contract through 2012, and we're having very constructive discussions with customers now about how to extend that sustainment in a way that is valuable to them.

Our next question comes from David Strauss with UBS.

Good morning.

Good morning.

Bob, there has been a lot of discussion in the press about this $614 million in award fees on F-35.

Could you just comment on your ability to actually capture a portion of those award fees going forward and what does your guidance for margin improvement on the F-35 assume there, and then just a quick one for Bruce, Bruce, can you give us an update on CAS harmonization?

David, I will be happy to, and I will ask Bruce to go ahead and comment on the guidance segment of your question, but so if you look at the system design and development contract, the award fee remaining is $614 million.

What we're doing now with our customers as we work on what I have described as the rebaselining of the program is to reorient the scope of work that needs to be done, to highlight those critically important milestones that demonstrate tangible accomplishment, that is something our customers want and insist on and, David, so do we.

It is vitally important to lock up the requirements, to know what's expected, and to be able to put our resources and talent against those expectations such that we have very measurable results at a milestone point.

We are then working with customers to allocate the award fee potential that's embedded in that $614 million to each of those milestones to reflect their relative value.

The degree to which we are able to earn that $614 million is absolutely tied to the degree we are able to execute the requirements that those milestones are associated with.

If we are perfect or near perfect in our performance, then we ought to be able to recover all or near all of that $614 million.

If we aren't, we'll keep you posted about how much of that we are able to recover.

I am very pleased with the quality and the character of the discussions that orient our ability to earn award fee as a function of our demonstrated performance against milestones.

In the vernacular this is described as more objective measures of performance rather than subjective measures, and I think we all like the object objectivity of knowing what we have to do to earn a fee in the SDD program.

David, I will try to address your margin improvement question.

I hope you saw that in our press release today we actually did reflect a step up on our early production lots on the F-35 program.

I would say we're progressing about as we expected to on those early production lots, and we retired risks on each of the first three lots that allowed us to actually increase the booking rate on each of those contracts.

I think your question was probably more related to the SDD program, the development program, and there we still expect that we're going to have some ability to have some margin improvement there in the latter part of this year, and that's more associated with the milestones remaining this year quite frankly at this point than the negotiation of the remaining $614 million of award fee.

That's something that will affect us more in later years than this year, so I think your last question, David, concerned cash harmonization.

I think we're frankly from my perspective we're almost getting late to need in that regard, and I think the latest that we're hearing and it is a little fuzzy at this point, but that the harmonization might in fact actually slip out to 2012.

I am not speaking for anyone when I say that, but we're approaching May here, and I would have thought we would have had this done by now, but we're not there yet.

Our next question comes from Sam Pearlstein with Wells Fargo Securities.

Good morning.

Since everybody else is doing two, I will throw two in as well.

Bruce, you had talked about the C-130J being 25% to 30% of your yearly deliveries going to be in the first half.

If I look at what did you in the first quarter does that mean only one or two in the second quarter?

I am wondering what that means for aerospace in Q2 and then secondly you had talked about the ULA equity earnings having a huge fourth quarter in terms of timing.

Seemed like the equity earnings were heavier in the first quarter.

Is that just a timing issue?

Thanks for the question, Sam.

C-130 I did tee up the fact that we thought deliveries would probably be on a scale of about 25% to 30% in the first half of the year, and 75% or so in the second half of the year.

That's still what we see happening.

We did have three deliveries in the first quarter.

You mentioned one delivery in the second quarter.

We'd actually think it would be more of somewhere in the fourish range probably with the remaining deliveries probably 19 or so, getting up to the 26 we expect to happen in the year occurring over the second half of the year with a majority of those in the fourth quarter.

Your second question dealt with ULA equity earnings, and talked about the spike that I mentioned last call.

The spike I am talking about is actually associated not with ULA.

It is actually associated with USA, the United Space Alliance.

Think of that as the entity that provides shuttle operations support, and the reason for the increase in the fourth quarter is because as we have the planned wind down of the shuttle program taking place in the fourth quarter, we think there are some risks that will be retired at that point that will allow us to make a pretty good increase in the bookings through that joint venture that will flow into our reported results, and you will see that.

That will be a noticeable improvement in our space systems company and its fourth quarter performance versus the other three quarters.

ULA was a little higher in the first quarter of this year, but expecting it to basically stay somewhere at that level the rest of the year and nothing other than a timing issue in the first quarter there.

Our next question comes from George Shapiro with Access 342.

Bruce, you commented that the revenues in electronics which seemed to me to be a little better than what you thought and space a little bit, so why not raise the revenue forecast for the year or were these just timing issues?

George, I think especially in electronic systems we did -- I made in my opening remarks I made the comment that we were pleased, I will say, and maybe a little bit surprised at the results we -- I personally thought we would be down a little bit in the year-over-year comparison in the first quarter simply because of the presidential helicopter activity last quarter.

We did have some good volume in the first quarter.

I think we're still sorting through that, George, whether that is timing or whether that will carry through for the year.

I actually feel pretty good about the year forecast in electronics systems.

I wouldn't expect it to be too much higher on the revenue side even if this does translate into a little bit of increase I wouldn't expect it to be dramatic by any stretch.

Space was basically tracking right in line with our expectations, and I don't see a change in anything we talked about from a guidance perspective there either.

Our next question is from Douglas Harned with Sanford Bernstein.

Good morning.

Good morning.

Can you comment on the long-term expectations for F-35 margins and what I am getting at is if you contrast it with other aircraft programs when they reach maturity, how would you expect the F-35 to perform from a margin standpoint and particularly in light of discussions on potentially some lower volumes to the Air Force and some pressure from foreign buyers on costs?

Could you comment on where you think this ultimately will head and what could change it?

I would be happy to, Doug.

I think part of what frames my view personally is taking a quick look back at airplane programs.

I don't want to say historically because that sounds like too long a time horizon, but I am old enough now that I have done this a few times.

Every airplane program I have ever worked on and every airplane program that I have reviewed has a similar set of circumstances that they face.

We go through the development program.

There are challenges in development.

I assure you we do not take these challenges lightly.

In fact, I would tell you we respect the degree of difficulty in designing and developing and fielding new complex systems as much as anybody on this planet.

I don't see anything at all extraordinarily more challenging on the F-35 that should adversely affect our ability to generate profitability and earn out margins here.

In fact, there are several features of this program that I rather like.

The more volume we have, the more stability we have, and that's why we're working so closely with the department now to get a restructured program that increases the probability of success over the long run because that increased probability of success increases our probability of meeting all our expectations including margin expectations.

Having the international content, and I would say even with all the varying descriptions about the program that certainly there is no shortage available today, international interest remains strong with eight partner countries, and we have about eight countries who are not in the partnership basis who are making inquiries, so the FMS potential looks healthy as would the direct foreign sales potential.

So our goal and we addressed it a little bit on the SDD phase is to build momentum and reduce risk and earn to the maximum extent practical a segment of that $614 million, be efficient in our ramp up of production, where we ought to be able to build upon the risk reduction in the program to improve our margin performance there which I think is well established in the overall behavior program performance, and then look to the international marketplace.

The other feature of the F-35 that I think is very interesting relative to profitability is the overall sustainment opportunity in this program because the architecture is quite different.

Looking to us and our industry supply chain partners to play a significant role in the sustainment of the airplane overtime, that again is going to be dependent upon our ability to execute and deliver value, and that's why we're so rigorously focused on making sure we've got the right resources in the right place at the right time.

So I think there is every bit the earning opportunity on the F-35 as we have seen on any of our programs.

Our next question comes from Heidi Wood with Morgan Stanley.

Two-part question I guess for Bob and Bruce.

You commented on the flight test on some of the successes but you didn't talk about the number of flight tests you achieved in the quarter.

How many have you done year year-to-date and how is that versus plan?

Heidi, we're happy to talk about any detail of the program at any time because that's part of the building momentum process.

In that building momentum I think there are going to be some periods where we do better than plan and some periods where we don't do as well as planned, but my goal here is to look at the long-term trend and the opportunities and make sure we're responding properly.

I will tell you that if I look at January, February, March, and April, year-to-date we're a little bit below our cumulative plan.

We were good in January and let me say February and March, and I think we completed the quarter a couple of tests ahead of the four tests over the plan of 29, so we were at 33.

In April we plan on 29 incremental flights.

We have flown five times April to date.

We're delivering more assets into the flight test program, so we expected a more vigorous last portion of the month than first portion of the month.

In every flight test program and we're no different here, we face the traditional things of planned maintenance actions which really affects the phasing of the 29 flights that we wanted to accomplish, and then unplanned maintenance action which essentially means you take the airplane out to the flight line and an actuator doesn't work or you get -- because these are instrumented airplanes you get a reading on an instrument that is off nominal.

We don't fly the airplane when we have that occasion because we want to understand -- the whole purpose of a test program is to understand the characterization of the airplane or weather delays which we have seen I think a fair number of weather issues.

We are going to fly this airplane irrespective of all of those challenges, so I tell you the the arc of the test program is good to me.

We're accelerating through about 400 tests that we planned for the year 2010, and we'll keep you posted at each step along the way because it is certainly important that we demonstrate the maturity of the test program.

I would tell you what -- my observation is sometimes there is a more hyperbolic reaction to did you fly at 2:00 today and the consequences of that which I think maybe amplify apprehension that isn't warranted, but on the other hand it is absolutely necessary and -- for us to fly more sorties with the twelve flyers that we have to deliver them into the flight test program and demonstrate the maturity of the airplane, and we're doing that, and we're not going to do that in a way that attempts to skirt any test at all, and our behavior has very consistently been to put a priority on building a very high quality jet that meets all the key performance parameters and then go test that, not to thrift on any of the performance, to try to accomplish a series of tests.

Our next question comes from Rob Stallard with Macquarie.

Quick question for Bob.

Bruce highlighted the strong cash flow in the quarter, and your low leverage.

Do you think this is an opportunity to have another look again at your dividend payout and whether Lockheed should be paying a high yield?

We look at that, Rob, as you might expect.

I think our first goal has always been go get the cash and cash generation has been a significantly high priority.

I am really pleased with the Company's ability to generate consistent cash flows like this.

I think it is a conspicuous strength of our Company and a strategic advantage.

Then we very much routinely look at how we can best deploy that cash.

I know you're familiar with the discussion because it is not a new discussion for us.

We certainly look at dividend policy.

We look at share repurchases.

We've committed to at least 50% of free cash flow return to investors because of the strength in our cash generation.

We have exceeded that goal consistently and considerably, and we look at the string of pearls acquisition strategy which we want to continue to do but we're very selective in those acquisitions, so I assure you that we're very focused on both sides of the equation, the ability to go generate cash because we have earned that and then also how we can best deploy that cash to the interest of our shareholders and that that will include taking a look at dividend policy.

We've had double-digit increases I think for seven years on the dividend policy.

It will include a careful examination of our repurchase strategy and philosophy that has really been based on opportunistic share repurchases, and then we'll continue to work an aggressive screen in the string of pearls acquisition philosophy for for those enterprises that would add sustained, enduring value that would be at the right price and the right quality levels.

Our next question comes from Joe Nadol from JPMorgan.

Good morning.

Good morning.

Bob, you went over the Orion change.

I am wondering since the NASA landscape is to fragmented right now and I guess so uncertain, and there is this big $6 billion hunk of money, for example, out there for crew transport with not that much detail around it yet, are there other opportunities for Lockheed Martin to gain market share in human space flight?

That's a great question, Joe, and I wish I had a great answer, but the honest and short answer is I don't know.

We are focused now on working with NASA to get more detailed description of what the crew rescue vehicle that Orion will become, will look like, what its content will be, and whether or not there are more opportunities for us to gain market share in our judgment is going to be very much determined by the quality of that market.

If there are competitive opportunities, we have a long I think well understood set of capabilities in not only human space flight but exploration, so we would be interested, but those opportunities are going to be characterized by among other things whether we're asked to invest what the quality of the investment would look like, would there be a return on investment, the one thing I think we know about the space environment particularly human space flight, it is a tough demanding environment.

In other words, the performance levels for escape velocity among other things are so extreme and the performance margins are so tight, you really have to be at the top of your game here, and we work hard to make sure we are at the top of our game.

The other aspect that aligns with our interests on the overall space component of business might be opportunities in the United Launch Alliance for more lift capability from the Atlas and the Delta systems that are in ULA, but again that's pretty much a yet to be determined.

As we see more definition on the NASA plan and strategy going forward but there might be some particularly in the near term opportunities for ULA.

Our next question comes from Ron Epstein with Bank of America.

Ron?

Ron, your line is open.

Can you try pressing your mute button, please.

Hello.

Can you hear me?

We can hear you.

Good to hear you, Ron.

Sorry about that.

Bob, I was wondering if you could talk to the new presidential helicopter program and when you think that's going to -- the timing on that and you guys are teamed up with a different team now, if you could speak to that?

Sure.

The timing is a little off on the horizon.

We're looking at requests for information as the administration looks to -- based on all that was learned on the VH71 program what the right definition, what the right system components, what the right mission profile would be for a replacement for the presidential helicopter.

So I would tell you, we're at the early stages of conceptualizing what would be required and what would be necessary while we are including in the broader conversation the lessons from the VH71 program.

We have had, Ron, I think very good experience and really high quality credentials in putting mission systems into helicopters, and that is an area of specialization for our Company and I say respectfully we're good at it.

We have had a relationship with Sikorsky on the MH60 Romeo and Sierra helicopter programs where we play that role in a Sikorsky platform in a fashion that's been good for Sikorsky, good for us and I think highly valued by our customers, so it is the basis of that relationship and the quality of the interface and the interaction that we have had there and our own reflection that we have learned a lot on the VH71 program, and I personally believe much of the mission systems work that was done under that contract would be certainly valuable to take a serious look at, and our relationship with Sikorsky and our experience of working together being the mission system integrator on their air frames has been a good and productive one familiar to us, familiar to them and good value to customers, and that's why we did what we did.

Our next question comes from Peter Arment with Broadpoint.

Good morning, Bob, Bruce, question on international sales.

You mentioned I think you have a goal out there for 2012 of 20% of your overall mix, and if you could just give us some color where today and what are you seeing out there in the international marketplace, Bob, on terms of any changes in timing regarding achieving that goal and maybe color on major campaigns?

Thank you.

I will start and Bruce will back up a little detail.

So I mentioned earlier, Peter, the compliment to Secretary Gates on advancing again the discussion of providing genuine reform to the export control policies of the country.

We do this a lot as you would expect and our observations about the system are very clear.

We have a lot of really good people working in the government overseeing a process to assure that we don't diminish the security of our country because we allow technologies to escape.

The people are good.

The process is not as effective as it should be.

What we have asked the people to do is to essentially work harder and harder and harder and more diligently in a process that isn't serving us well because the process is too broad and too amorphus, and in that broadness is slows down the overall tempo of companies like ours to effectively compete in an accelerating global marketplace.

I assure you nobody, particularly nobody here, will ever take a step toward releasing the kind of technology that would make our country less secure, and that is an immutable condition, but we think if we focused a system on really examining with care the most critical technologies and absolutely safe guarding them with rigor, and letting the rest of the market flow, it would improve our prospects internationally.

We think it would be enormously good for the US economy, and I think it would probably be part of a formula that would add to job creation and then I look at our company specifically, and note we have a mature portfolio.

That portfolio includes programs like the F-16, the F-35, the C-130J, air and missile defense programs like THAD and Patriot and Aegis that already have international content.

I mentioned the prospects again without over reaching current set of challenges, the Littoral Combat Ship interests me, the prospects of a joint like tactical vehicle that would have not only keen interest in the US but have the ability to build international constituencies.

I like that very much because I think those kinds of program opportunities really create an architecture where you can give the very best value for our US government customers and citizens and taxpayers who fund those programs, give them the very best industrial opportunities for international suppliers with whom we have great partnerships and also give those foreign governments great access to systems that are not only high quality in and of themselves but tend to be far more interoperable and far more aligned so that when our nation has to act with other nations, these systems have already been balanced so that they work effectively and well together.

I do think our goals are achievable here, and we build our systems architectures around the prospects that we can secure the technology we can't release, they will be open and extensible and interoperable so that we can include international participants.

Peter, I will jump in and -- you asked for specifics as far as how we go about achieving the objective of 20% of sales in 2012.

We started off we had a good first quarter.

I think Bob hit several of these, but we did have the F-16 buy to Egypt for 20 aircraft.

We also had a sale of some sniper targeting sniper and lantern targeting navigation pods for Turkey, and we had the two aircraft that Bob mentioned for C-130J with Tunisia.

Later this year we're looking to hopefully close on a potential C-130J deal for the UAE worth somewhere in the order of 12 aircraft potentially.

There is also a PAC-3 deal for both Taiwan and UAE towards the latter half of the year, and I will just say that as we sit here today we feel good about our ability to get to the 20% because as we especially as we get towards the end of 2010 a lot of what's going to materialize in terms of sales in 2012 will be in backlog by the end of 2012, specifically the F-16 program and the C-130s.

We can already see the international content that's going to be delivered in 2012, and we know with a high degree of certainty what that looks like today and that's what gives us confidence in that 20% number.

Our next question is from Joe Campbell with Barclays.

Your line is open.

Please state your question.

Hello.

Can you hear me?

Yes, Joe, Joe, good morning.

Great.

Good morning.

The new CEO at SAIC said the other day that the outlook for his addressable Fed services market was flat to down, that the days of rising tide lifts all boats are over, and that growth in his view would have to come from taking share from competitors, and he planned to do that.

I wondered, you know, the service business looked okay in Q1 for you.

I wondered -- the service business looked okay in Q1 for you, I wondered if you could compare and contrast your own outlook for the services business to that somewhat bleak outlook by the new SAIC CEO?

Thanks, Joe.

Bruce will come back and give you a little detail about the outlook.

I will say that we know and work well with the new CEO at SAIC.

We have not built a philosophy based on a rising tide lifting all boats.

We're very selective about what we have in our portfolio, kind of highlighted the census.

I think we have a very broad set of capabilities, points of presence in customers, well we I don't understand programs in civil, and in defense.

We're putting an additional level of focus and attention on the execution parameters in those businesses as we have described to you before, and I believe that the guidance that we've given reflects our expectation that we're going to continue to perform well in these markets and Bruce will give you detail there.

Joe, just to remind you we operate in three lines of business in that area and we like to call the civil, defense, and intelligence.

Defense is both civil and defense are roughly 37, 38% in terms of the sales volume in the business area, and our intelligence business is about 25%.

Both the defense and intelligence, we expect those two lines of business to grow somewhere in the upper single-digit ranges, getting close to 10%.

We think the Intel business will stay fairly flat, more a function of just the smaller size of the individual contracts being awarded there, the sheer numbers of contracts we're seeing in the intelligence side, haven't necessarily changed, but the dollar size of those programs has diminished somewhat.

So our growth is going to be driven by those two LOBs, civil and defense, and we still feel that somewhere in the 6 to 8% range for the year is achievable.

As we look at the backlog we had at the end of last year and what we won in the first quarter of 2010, that still looks very doable to us.

Shaun, this is Jerry.

I think we're coming up against the hour.

Maybe one more question.

Our final question comes from Troy Lahr with Stifel Nicolaus.

Just wanted to follow up on that last IT.

Are you seeing pricing pressure out there for some of these new contracts and do you have to kind of lower your pricing or do you think there is value add there that you guys don't have to?

Troy, I will say this marketplace has a lot more competitors today than it had a few years ago, so I would say there is definitely a greater number of like sizes competitors in the arena than say we had a few years back.

I think that has put some pricing pressure on that.

We're seeing that.

I think that's one of the reasons why we've tried to tailor our margin levels at the levels we're talking about as we think that's achievable, but getting particularly affects our civil business and given that our civil business has been a part of the business area and the LOB which has been growing at the fastest clip, that's put some of pressure on the margin, the reason you see us at the level we're at today.

Shaun, I want to thank you for your help on the call today.

Thanks everybody for spending your time with us this morning.

We're looking forward to talking to you soon and certainly updating on you our next call together.

We'll sign off on this end.

Thanks again, everybody.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude the conference.

You may now disconnect.

Good day.